Sodastream – A passing fad or a real business?
The concept of homemade soda has been around for a long time and it’s not a new idea. What Sodastream brings to the market is a simpler and cooler way to do it. The current management was installed in 2007 and they have been largely successful in building a sustainable business in Europe and the Middle East based on the razor/razor blade business model. That said, the United States poses the biggest potential market but also the most difficult market to navigate for a foreign based company.
It will not be easy but the market is there for the taking if SODA follows a laser-focused and comprehensive market entry strategy.
Let’s first take a quick look at Sodastream’s fundamentals:
Assuming an average Soda maker price of $50, SODA’s 4-year customer lifetime value is estimated to be
Av. Pricing item/Cust. Value
Sodamaker $50.00 1 $50.00
CO2 $6.33 12 $76.00
Carbonated bottles $8.00 2 $16.00
Flavors $2.94 16 $47.00
Consumables Revenue $ 139.00
[Source: SODA Form 6-K September 2011)
The business is currently estimated to hit between $195MM and $220MM in revenues this year with 2.5 soda-makers sold. SODA only needs to double its current annual sales of soda-makers to hit $1BB in revenues assuming that it will garner recurring consumables revenues from makers sold in previous years (hence $1BB/$189.00 = 5.3MM soda makers). Not an unreachable goal by any stretch of the imagination and at current growth rates, this should be within the next 4.5 years assuming a 23% YoY CAGR.
I am slightly concerned however, with the company’s Cost of Sales which will rise to 47% of total sales this year vs. 44% three years ago. I would likely attribute this to the higher transport costs associated with getting product to the United States since the company’s primary manufacturing facility is based in Israel. SG&A costs remain within a tight 45% range in the last three years with margins ranging between 7-11%.
The revenue model seems to be working ok.
On the balance sheet, SODA carries Current and Quick Ratios of 3.16 and 2.30 respectively, indicating that the company is on top of its working capital at first glance. That said, Working Capital per Dollar of Revenue is at 57% which I consider rather high (25% is considered to be at the higher end) with an inventory turnover ratio of 2.05, rather low for what the company says is a fast selling item. It is possible then, that inventory remains on the company’s balance sheet until it is sold; a situation I expect to change with increased market share and acquisition of more distribution channels.
Further reason to worry, lies in the company’s operating cash flows – currently losing a nickel in cash for every dollar of revenue. The primary reason for this appears to be the high and growing level of working capital that the company currently holds.
A lot has been said about the idea having been around for over a hundred years with no one successfully running with it. Well, tablets had been around for about 15 years (a couple of lifetimes in tech) when Apple launched the iPad and music players had been around for ages before the iPod came along. That means that the key lies in management talent and capacity for successful execution.
SODA’s market appears naïve and rather conservative given the CEO’s last public appearance and earnings call, and they have not been truly tested yet a la “a proper full-blown disaster”.
So is SODA worth investing in?
Well, the business model seems to be working ok and the company’s success in this and other markets will be greatly dependent on almost perfect execution coupled with prudent balance sheet management ability. Further, management needs to realize that developing increased distribution channels will be crucial to growing market share. I do however love the fact that the devices are readily available on most online mass marketplaces like Amazon, are in Target and Sears, not to mention Bed Bath and Beyond. The recent entry of Primo Water Corp (PRMW) into the market with an almost identical website is testament to the attractiveness of the business model.
The company’s share price has been largely detached from the company's business in the last 3-5 months mainly as a result of momentum-based speculation and attacks by pundits.
Down 52% in the last 3 months, the stock carries a current PE of about 30 (forward PE of 17), a PEG of 0.89, Zero debt/equity and Q/Q EPS growth of 54%. November 7 will be the earnings call day of reckoning and I expect them to hit a home run, testament to a strong business model.
Disclosure: I am long SODA.